A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects.

January 17, 2017

The Internet, Blockchain, and the Evolution of Foundational Innovations

Last year, a panel of global experts convened by the World Economic Forum selected blockchain as one of the Top Ten Emerging Technologies for 2016, based on its potential to fundamentally change the way economies work.But, how transformative will blockchain turn out to be?How long is the transformation likely to take?And how will it compare with the Internet-based transformation of the past few decades?

These questions were nicely addressed in The Truth about Blockchain, a recent Harvard Business Review article by Harvard professors Marco Iansiti and Karim Lakhani.Their article starts off with one of the best descriptions I’ve seen of the long-term promise of blockchain.

“Contracts, transactions, and the records of them are among the defining structures in our economic, legal, and political systems.They protect assets and set organizational boundaries. They establish and verify identities and chronicle events.They govern interactions among nations, organizations, communities, and individuals. They guide managerial and social action. And yet these critical tools and the bureaucracies formed to manage them have not kept up with the economy’s digital transformation. They’re like a rush-hour gridlock trapping a Formula 1 race car. In a digital world, the way we regulate and maintain administrative control has to change…”

“With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision.In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared. Intermediaries like lawyers, brokers, and bankers might no longer be necessary.Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction.”

Such a blockchain-based transformation is still many years away.That’s because blockchain is not a disruptive technology, whose impact, once in the marketplace, is often quite rapid. Blockchain is a foundational technology, like electricity and the Internet, whose transformational impact takes much longer, - decades rather than years.

A disruptive innovation is one that successfully challenges a traditional product or business model with a lower cost solution, typically developed by a small company with few resources.What makes disruptive innovations dangerous to incumbent firms is that, if allowed to gain a market foothold, they can get on a learning curve of rapidly improving quality and capabilities while preserving the lower prices and/or ease-of-use that drove their early acceptance. Consequently, they can end up creating new markets and toppling the incumbents from their leadership position, as has been the case with word processing, digital cameras and smartphones.

Blockchain has the potential to transform our economic and social systems.But the adoption process of foundational technologies like blockchain is gradual, incremental and steady, unlike the hockey stick adoption we typically associate with disruptive innovations.Foundational innovations must overcome many barriers, - technological, organizational, governance, political.While the impact of blockchain could well be enormous, its transformational impact is decades away.

What’s the likely adoption process for foundational technologies like blockchain?The HBR article explored this question by examining the decades-long evolution of a highly successful foundational technology with which we’re all familiar, - the Internet, - and then developed an adoption framework consisting of four phases.Each phaseis defined by the degree of novelty, - low or high, - of the applications being supported, and by the complexity required to coordinate the various elements of the application.Let’s look at these four phases, as they apply to the Internet.

Single Use (low-novelty, low-coordination).ARPAnet, the precursor of the Internet, first gained traction in the 1970s as the basis for supporting e-mail among a relatively small number of researchers involved in its development.Its packet switching architecture didn’t require pre-established connections, representing a major innovation over existing circuit switching networks.

This first step should be simple, as it’s essentially a way of testing the new technology with an easy-to-implement low-novelty, low-coordination application, - hoping that it will lead to a less costly, simpler solution.It’s not surprising that in their early stages, it’s hard to differentiate between disruptive and foundational innovations because their objectives look so similar.

Bitcoin, has played a similar role for blockchain.Introduced around 8 years ago, it offers an alternative peer-to-peer payment method that enables a relatively small number of users around the world to transact with each other directly, without a financial or government intermediary.Bitcoin put blockchain on the map, just like e-mail did for TCP/IP.

Localization (high-novelty, low-coordination).In the 1980s, the use of ARPAnet was expanded to include universities, supercomputing centers and other research communities.These TCP/IP networks were deployed within their respective institutions, but were also able to interoperate across institutions through the use of common protocols, giving rise to the network of networks that became known as the Internet.Commercial users were still not allowed at this stage.

Beyond e-mail, use of the Internet was expanded to include the transfer of files, access to computers, voice and video connections and other applications, demonstrating that TCP/IP was a general purpose architecture that could, over time, replace existing computer and telecommunication networks.

Blockchain is now entering this second phase.Private blockchain-based prototypes are now taking place, mostly involving small number of firms in the financial services industry.“We anticipate a proliferation of private blockchains that serve specific purposes for various industries,” notes the paper.

Substitution (low-novelty, high-coordination).The advent of the World Wide Web in the early- to mid-1990s brought the Internet to its third phase - its adoption by the much larger commercial world.The emphasis was now on scalability and coordination, - the ability to support a fast growing number of users, content and applications.Given that the Internet and Web were now reaching a large, new user audience, their early third phase applications had to be relatively intuitive and easy to use.

In my opinion, customer self-service was the killer-app of these early days of the commercial Internet.These kinds of apps were simple, yet quite useful.It was now easy to do for yourself many ordinary activities that previously required a trip to a store or a phone call during business hours. You could access the latest sports results, check the weather of any city in the world,track the status of Fedex and UPS packages, or buy a book or CD online with nothing more than a browser and an Internet connection.Users could now easily get whatever information they wanted any time, day or night.

Transformation (high-novelty, high-coordination).A decade later, the Internet, moved into its fourth phase.Along with smartphones, cloud computing, social media, analytics and related technologies, the Internet has been systematically transforming one industry after another.

Internet-based platforms have given rise to ecosystems and network effects.The more products or services a platform offers, the more users it will attract, helping it then attract more offerings, which in turn brings in more users, which then makes the platform even more valuable.Moreover, the larger the network, the more data is available to customize offerings to user preferences and better match supply and demand, further increasing the platform’s value.

“Ultimately, it took more than 30 years for TCP/IP to move through all the phases - single use, localized use, substitution, and transformation - and reshape the economy…The parallels between blockchain and TCP/IP are clear.Just as e-mail enabled bilateral messaging, bitcoin enables bilateral financial transactions.The development and maintenance of blockchain is open, distributed, and shared - just like TCP/IP’s.A team of volunteers around the world maintains the core software.And just like e-mail, bitcoin first caught on with an enthusiastic but relatively small community.”

“TCP/IP unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. It has the potential to become the system of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence and control emerge…”

How long with this all likely take?“If bitcoin is like early e-mail, is blockchain decades from reaching its full potential?,” ask Iansiti and Lakhani.Their answer is a qualified yes.The blockchain transformation of the economy will require agreements on standards and processes across institutions around the world, as well as major social, legal and political change.It’s very hard to predict how long this will take.

Building on and leveraging the Internet will be a great help.“In addition to providing a good template for blockchain’s adoption, TCP/IP has most likely smoothed the way for it.TCP/IP has become ubiquitous, and blockchain applications are being built on top of the digital data, communication, and computation infrastructure, which lowers the cost of experimentation and will allow new use cases to emerge rapidly.”